The problem is that as a consequence of past bad loans, the banking system has lost a good part of its capital. People are not pulling money out of banks anymore-in fact, they are putting money in.

Back in the fall, the authorities managed to prevent a financial meltdown. There are two areas in particular that keep me up at night. This time the authorities are applying the right medicine: they have cut interest rates to zero and are keeping them there, they have saved the banking system from collapse and they have introduced the largest stimulus package in history.Īnd yet I cannot help worrying that the world economy may yet spiral downwards. Luckily with the benefit of those lessons, we now know what not to do. It was no wonder the global economy crumbled. They let the banking system go under, they tried to cut the budget deficit by curbing government expenditure and raising taxes, they refused to assist the European banking system, and they even raised interest rates. It did so because the authorities applied the wrong medicine to what was a very sick economy. Over the next 18 months between January 1930 and July 1932 the bottom fell out of the world economy. The stock market is down 50 to 60 percent, profits are down 50 percent, unemployment is up from 4.5% to over 8%. If you take our present situation, 16 months into the current recession, we're about at the same place. The stock market was down about 60%, profits had fallen in half and unemployed had climbed from 4% to about 10%. In December 1930, the great economist Maynard Keynes published an article in which he described the world as living in “the shadows of one of the greatest economic catastrophes in modern history.” The world was then 18 months into what would become the Great Depression. Amazon Exclusive: Liaquat Ahamed on the Economic Climate

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